Negotiating Due Diligence Periods?
A key element within an offer is the length of time a buyer is requesting to conduct its due diligence and vet out all issues. Because buyer deposits are typically refundable until this feasibility period has expired, the seller wants as short a period as possible to get the buyer committed to the transaction with non-refundable deposits.
Most due diligence periods seem to range from 30 – 120 days, depending on the condition of the property and the development complexity. If the lots are graded and finished, much of the development risk has been taken out of the equation. The buyer will mostly be focusing on the market and financial analysis, which should be completed in 30 days. If the property has no site planning or physical improvements, the buyer will need to work with a land planner and consultants to determine what can be accomplished on the site and how much it will cost to develop the lots. Depending on the complexity of the property’s soil and physical characteristics, the due diligence effort may take 60, 90, or 120 days.
The seller will look at this due diligence as a “free look” period, so therefore will be looking for the shortest period. As a buyer, you should know what your competition will offer and propose accordingly. In the example of finished lots, a buyer might request 45 – 60 days and the seller could counter with 30 days. Other terms such as price, the amount of the deposit, and the close of escrow timing may have a factor in negotiating this due diligence period. While a seller may not want to accept 60 days, the price offered for the lots may be higher than other offers to the point the seller will bend on this deal point.
In some cases, I have seen buyers offer a very short due diligence period to make their offer look better than others. On one property, I recall a large builder offering a 30-day period for an ungraded parcel that most others were probably offering 60 – 90 days. But this property was in high demand and the buyer was using 30 days as an enticement to get their offer accepted. Of course, the buyer internally needs to make the commitment to get its due diligence analysis done, which often needs the blessing of the owner or division president.
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